Finding high-upside opportunities in devalued areas is the holy grail of investing. But it’s easier said than done.
Unless you’re Ryan Jacob, manager of the Jacob Small Cap Growth Fund (JSCGX).
He doesn’t focus on any specific sectors or themes, instead opting to focus on the qualitative attributes of a company. Is its management team good? Do its products have a competitive advantage? Are its customers obsessed with its products?
It’s an approach that’s driven impressive performance in the month of June, returning 7.3% through last Thursday’s close, making Jacob BI’s Investor of the Month for June.
Jacob has also been dominating over the past year, nearly doubling the S&P 500’s 12% return over the period, and beating benchmark small-cap ETFs by even more.
Always one to cover all bases, Jacob also looks at quantitative measures like cash flows, valuations, and balance sheets.
“We’re just constantly really trying to throw as much as we can into the funnel,” Jacob said.
“It’s not a high hit rate” as to which stocks eventually end up in the fund, Jacob continued, “but we’re able to kind of uncover specific situations that we think meet our criteria.”
As of April 30, the top five holdings in the fund included: OptimizeRx (OPRX) at a 7.7% weighting; Alphatec (ATEC) at 6%; Heron Therapeutics (HRTX) at 5.9%; Powerfleet (AIOT) at 5%; and Zillow (Z) at 4.6%. Sector-wise, the fund is most concentrated in technology (22.5%), industrials (21.6%), and healthcare (19.8%).
As an example of the kind of unique opportunity that draws Jacob to a stock, he invested in spinal surgery company Alphatec because of the CEO, Pat Miles, who the firm brought on in 2017. Previously, Miles had a successful 16-year run at competitor NuVasive, serving in roles like chief operating officer and vice chairman.
“If you just looked at the financial profile of Alphatec, it wouldn’t really tell the story,” Jacob said. “The story was them being able to attract this new CEO that had high standing in the industry and would be able to attract a lot of talent and really put them on the map as a real player.”
While JSCGX has posted strong performance over the last year, small-caps in general have been left in the dust by their larger counterparts since the Great Recession in 2008. But small-caps have gotten so relatively cheap that they should be due for a turnaround in performance, Jacob said.
CME Group
“Eventually, small caps won’t be in this purgatory that they’ve kind of had to suffer the last 15, 16 years. But we don’t know when that is,” he said. “We’re kind of long in the tooth here for the kind of market we’ve been in.”
